Family finances: Income a constraint in realising all goals

With about 70% of their portfolio in equity, the Navlurs clearly understand the importance of compounding. This translates to good financial planning since it means they can achieve most of their goals. They have, of course, made the typical errors, such as buying expensive money-back policies and having inadequate health cover, but these can be easily taken care of. However, the family's current income level also means that they might have to miss out on one of the most important goals that every Indian craves—a house. As for the rest of the goals, here's how they can meet them.

Rajeev Navlur, 35, lives with his wife Smita, a 31-year-old homemaker, and their 1-year-old daughter Riya, in Mumbai. He brings in a monthly income of Rs 43,500, and after accounting for household expenses, mutual fund SIPs, PPF and insurance premium, they are left with a surplus of Rs 6,094. This cannot be considered a high amount by any stretch, especially since expenses on Riya will only increase with time. However, the Navlurs can still achieve all their goals with the help of their existing investments without any need for fresh inputs, except for the goal of building a retirement corpus.

With a total of nearly Rs 11 lakh in equity, the Navlurs have taken this asset class very seriously. "My father has been investing in stocks for the past 40 years and I take his advice, but I am not very comfortable with direct investment," says Rajeev. The Navlurs have a total investment of Rs 2.67 lakh in 19 stocks bought over the past four years. Pankaaj Maalde, head, financial planning, apnapaisa.com, suggests that the Navlurs sell these stocks. "Direct equity investment requires an in-depth research and analysis and should be avoided unless the investors are extremely informed about the sectors. Instead, they should move the proceeds to mutual funds," says Maalde.

Surprisingly, the Navlurs are more aware about their life insurance needs than most other families we have featured. They have two term plans of `25 lakh each, and two money-back policies from LIC and ICICI worth Rs 5 lakh. This, along with their liquid investments of Rs 16 lakh, gives the Navlurs a cover of Rs 71 lakh, which is adequate. However, we suggest that they switch their term plans to the online mode to save on premium.

Although the money-back policies are expensive (annual premium of Rs 24,042 for a cover of Rs 5 lakh) Maalde suggests that they continue with them as these can make for the debt component in their portfolio. Also, the Navlurs must get a term cover for Smita, since she is currently on a sabbatical to look after Riya and intends to go back to work once the child is older.

However, unlike life insurance, health insurance has been neglected by the Navlurs. They have a family floater policy of Rs 3 lakh from ICICI Lombard. Maalde suggests they move from floater to individual policies, including one for their daughter, for a cover of Rs 3 lakh. They should also buy individual topup health insurance plans worth Rs 5 lakh for all of them. This will cost them around Rs 13,000 per annum. They should also buy a Rs 25 lakh critical illness cover and disability cover of Rs 25 lakh for Rajeev. This will cost them around Rs 12,000. Although this raises the total expenditure on insurance, it is advisable to take this cover to protect the family against any medical emergency.

Like most parents, the Navlurs want to save for their daughter's education and marriage and have planned well to achieve both these goals. For building an education fund of `32 lakh for Riya's higher education after 15 years, the couple needs to make a lump-sum investment of Rs 3.9 lakh today. This can be allocated from their existing mutual fund investment, which is expected to give returns of around 15% per annum. As for the corpus of Rs 1.03 crore that they shall need for Riya's marriage after 25 years, they need to make a lump-sum investment of Rs 3.15 lakh from their existing fund investment.

Besides these goals, the Navlurs have other medium-term goals, which include going for a domestic vacation, which will require Rs 1 lakh after three years and a foreign sojourn worth Rs 3 lakh after six years. For this too, they need to allocate Rs 6,500 of their SIPs and use the proceeds accordingly.'